SEBI is reportedly looking at several complaints from clients for misusing a clients’ power of attorney and pledging their shares for loan without consent.

After Karvy Mumbai-based broker VRise under SEBI scanner over alleged share pledgingImage source: Quoti Inspector via Flickr
Money Stock Broking Wednesday, December 04, 2019 - 16:26

It looks like the alleged fraudulent pledging of client’s shares to raise loans by Karvy Broking Services wasn’t a one-off case. There appear to be more brokers involved in similar misuse of shares lying with them on behalf of their clients. The latest one to be called out is VRise Securities Pvt Ltd, a brokerage house, which has now been called by SEBI to explain.

The amount involved is Rs 37 crore and it is said VRise did not obtain the approval of its client before pledging the shares. The news report on this states that the shares are currently locked in a stalemate between VRise and Edelweiss Custodial Services Ltd, a clearing member on the exchange.

People in the know told Hindu Business Line that banks do advance loans to brokerage houses based on the shares in their possession. But the banks have no mechanism to establish if the shared being pledged with them are indeed on the brokerage’s own account or being kept with them on behalf of their clients. Pledging shares of clients by brokers without seeking the approval of the clients is barred under SEBI regulations.

Edelweiss might be in the picture in this case since clearing corporations permit certain limits to the brokers to do trading, again based on the value of the shares they pledge. This is similar to banks fixing drawing limits to their customers based on the value of stocks of raw materials and finished goods held in their premises. The brokers appear to be inflating the value of the shares in their possession by including the ones their clients have lodged with them for safe keeping. The clients do this since it becomes easier to make the deliveries once they decide to sell certain shares and the brokerage firm’s services are used by them to buy and sell shares.

It is said the overall amount of moneys drawn by several brokers misusing their clients’ shares to raise loans or enhance trading limits could be as much as Rs 7,000 crore. Now it is for SEBI to do the investigations and discipline the erring brokerage firms.

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